Stock story: CMS Energy

CMS Energy is a high quality regulated utility delivering consistent earnings growth with exposure to the net-zero structural shift. (Reading time: 2 mins)

Stock story: CMS Energy

CMS operates in the supportive US regulatory jurisdiction of Michigan, serving 1.9 million electric customers and 1.8 million natural gas customers. Michigan's above average authorised returns and incremental allowances for renewables and efficiency position CMS as one of the most attractive regulated utilities in the US. Moreover, Michigan's forward-looking test year rate setting methodology reduces regulatory lag and dampens inflation risk, providing a high degree of confidence that the company will earn its authorised rate of return in full. Bipartisan support for a highly regulated utility sector in Michigan accentuates the constructive environment in which CMS operates.

CMS is in the early stages of its shift to renewables, a transition that is likely to support attractive growth in the company’s rate base and earnings well into the future. In 2020, just 11% of the electricity delivered by CMS was sourced from renewables. Yet this figure is set to rise dramatically, with CMS recently outlining one of the most aggressive decarbonisation goals in the industry, targeting an exit from coal-fired generation by 2025 and net-zero emissions by 2040. The investment required to achieve this goal will sustain high levels of investment for the next 20 years. Beyond this, Michigan's goal to be carbon neutral by 2050 and the resulting increase in electrification, should sustain CMS' investment in the electricity grid at relatively high levels. CMS' rate base (the key measure of a utility’s earnings potential) is projected to grow at a rate of around 7.5% p.a. over the next decade, supporting growth in earnings per share at a similar level.

We view CMS' recent decision to divest its non-core home improvement lending company, EnerBank, favourably. The move reinforces CMS' "Clean and Lean" strategy, leaving an almost entirely pure-play regulated utility. CMS' June 2021 Integrated Resource Plan (IRP) also sees the company transferring assets from its unregulated business, CMS Enterprises, to its regulated business, sheltering these assets from the risks inherent in competitive wholesale energy markets and providing a further boost to the growth prospects of its core utility operations.

CMS has delivered consistent earnings growth of around 7% p.a. over the last decade and on average earned above its authorised return, reflecting support from regulatory incentives and adder mechanisms. Considering the constructive regulatory environment in Michigan and a strong capital investment plan supported by decarbonisation goals, CMS is well placed to maintain consistent, reliable earnings growth and cash flows over the next three decades.

Sources: Company filings.

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